At $45 A Barrel, U.S. Producers Rush To Lock In Prices

U.S. oil producers pounced on last month’s 20 percent rally in crude futures to the highest level since November, locking in better prices for their oil by selling future output and securing an additional lifeline for the years-long downturn.

The flurry of dealing kicked off when prices pierced $45 per barrel earlier in April. It picked up in recent weeks, allowing producers to continue to pump crude even if prices crash anew.

While it was not clear if oil prices will remain at current levels, it may also be a sign producers are preparing to add rigs and ramp up output.

This week, Pioneer Natural Resources Co (PXD.N), a major producer in the Permian shale basin of West Texas, said it would add rigs with oil prices above $50 per barrel.

Selling into 2017 tightened the structure of the forward curve, with December 2017’s premium to December 2016 CLZ6, known as a contango, narrowing to $1.30, its tightest since June 2015. That spread had been as wide as $2.15 a barrel just four days earlier.

Open interest in the December 2017 CLZ7 WTI contract was at a record high of 122,533 lots on Friday, up about 20,000 lots from the start of April.

“U.S. producers have been quick to lock in price protection as the market rallies given that the vast number of companies remain significantly under hedged relative to historically normal levels,” said Michael Tran, director of energy strategy at RBC Capital Markets in New York.

It was not clear which companies embarked on the forward selling. In the past a handful of producers such as Anadarko Petroleum (APC.N) have sporadically hedged in large chunks.

But trade sources pointed to increased activity among financial instruments for the balance of 2016, calendar year 2017 and even 2018.

The uptick in producer hedging activity came as benchmark West Texas Intermediate (WTI) futures finished April up 20 percent for the biggest monthly increase in a year. Prices have rebounded by as much as 80 percent on expectations of falling U.S. production after touching a 12-year low in February.

On Friday, Baker Hughes reported oil drillers removed another 11 from operation the week to April 29, bringing the total oil rig count to 332, its lowest since November 2009.

The calendar 2017 strip CLCALYZ7 week climbed to $49.44 on Thursday, its strongest since early December. In January, it had traded as low as $37.38 a barrel.

To outlast the downturn, many producers like Continental Resources (CLR.N), are deferring completions on already drilled wells, known as DUCs.

“There are some companies that will hedge at $45 and $50, giving them more incentive to bring those DUCs on line,” said Hakan Carapcioglu, an energy market analyst with Ponderosa Advisors, a Denver-based consultancy.

To be sure, many have questioned the fundamentals backing the recent oil rally, particularly as U.S. crude inventories currently stand at a record 540.6 million barrels, according to the latest data from the Energy Information Administration.


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Dean Popplewell

Dean Popplewell

Vice-President of Market Analysis at MarketPulse
Dean Popplewell has nearly two decades of experience trading currencies and fixed income instruments. He has a deep understanding of market fundamentals and the impact of global events on capital markets. He is respected among professional traders for his skilled analysis and career history as global head of trading for firms such as Scotia Capital and BMO Nesbitt Burns. Since joining OANDA in 2006, Dean has played an instrumental role in driving awareness of the forex market as an emerging asset class for retail investors, as well as providing expert counsel to a number of internal teams on how to best serve clients and industry stakeholders.
Dean Popplewell